It is 2015, nearly eight years since the beginning of the end of the nationwide housing bubble that grew in the mid 2000’s. Different parts of the country were impacted more severely than others, and some areas still haven’t recovered completely. Meanwhile, enough time has passed that a few cities such as Austin, Miami, San Francisco, and Los Angeles are experiencing rapid price increases and heavy demand. Are the real estate prices in some cities becoming overvalued again? What does a housing bubble look like? And how can you tell if you are in the middle of one? It seems like it would be easily recognizable, but history has told us otherwise. Investopedia smartly defines a housing bubble as:
A run-up in housing prices fueled by demand, speculation and the belief that recent history is an infallible forecast of the future. Housing bubbles usually start with an increase in demand (a shift to the right in the demand curve), in the face of limited supply which takes a relatively long period of time to replenish and increase. Speculators enter the market, believing that profits can be made through short-term buying and selling. This further drives demand. At some point, demand decreases (a shift to the left in the demand curve), or stagnates at the same time supply increases, resulting in a sharp drop in prices – and the bubble bursts.
It’s no secret that real estate prices in Nashville, TN have been soaring upward the past two years. Although Music City isn’t on Trulia’s list of the, “Top 10 Metros Where Home Prices are Most Overvalued,” there is some concern among Nashvillians that a housing bubble might be forming. Homeowners who purchased properties close to the city in the 2010-2012 time frame have seen substantial gains of equity. But current listings for sale reveal that the cheapest properties in some zip codes have risen beyond attainability for many buyers. For example, the lowest priced home in 37215 is $333,000, and that is for a 1,666 square foot zero lot line house that shares a wall with it’s connected neighbor. The cheapest single family house that doesn’t share a wall or yard is $374,900. The nearby 37212 zip code has one property that is listed for $220,000, but it is a 906 square foot house being sold as-is. It is priced and marketed primarily for the lot value, meaning it will most likely be torn down and replaced with new construction. The next cheapest listing is a $379,000 residence at 408 Lancaster Avenue, where you get 1750 square feet of generally bland living space and the view from the front yard consists of the concrete wall right next to four-lane interstate 440.
Keep in mind that these are the lowest priced properties in two zip codes that contain over 18,000 housing units combined. Only 217, or just over one percent of the single family homes are for sale. And therein lies much of the reason for the run-up in pricing: low inventory combined with a multitude of buyers. According to real estate website Trulia, “The average listing price for homes on Trulia in ZIP code 37215 was $1,181,306 for the week ending Jan 28, (2015).” Although not nearly as extreme, “The average listing price for homes on Trulia in ZIP code 37212 was $537,050,” for the same time period. These are not the only expensive neighborhoods in Nashville. Other high priced areas include 12South, Oak Hill, Sylvan Park, and the 37205 zip code, which includes Belle Meade where, “The average listing price for homes on Trulia in ZIP code 37205 was $1,118,490 for the week ending Jan 28, (2015).” These figures may seem very high, and they are skewed because they are average listing prices and not the median prices which are much more popular in real estate statistics. But the reason I used the average figure is because the top prices across Nashville have lifted significantly, and when the top dollar properties are selling, they are pulling up the rest of the market. Agents are seeing higher dollar values when they search comparable sales. In turn, new listings are priced accordingly high. Due to the low inventory of listings, when desirable properties come available many are receiving offers that exceed the asking price. Of course this further propels the cycle so that the next house listed has even higher comps to draw from.
While the aforementioned zip codes have historically had above average prices compared to Nashville as a whole, traditionally blue collar neighborhoods such as West Nashville’s 37209, Inglewood’s 37216, and East Nashville’s 37206 have experienced price jumps in two years that have placed much of the housing stock out of reach for first-time home buyers and the lower middle class. Upon further inspection it is questionable if the increases can be sustainable. The price-rising will level off or decline when buyers stop paying the higher asking prices. At what point will that happen?
Some parts of Nashville have had a surge of new construction infill projects that are adding to the supply side of the equation. However, the vast majority of the new builds are priced over $300,000. In 37206 there are 178 houses for sale. Over 61% of those, 110 are new construction. However, out of the 110 new houses, only four are less than $300k. The builders and the investors that back them can say they are building what the buyers are buying. But there is not an endless pool of buyers for East Nashville new construction in that price range, and the flurry of building may have already met the demand. I spoke with a commercial broker who said that, “East Nashville has run its course. It is tapped out.” I’m not sure I agree with her completely, but the prices have come so far so fast, it seems like the market may need to take a breath and cool off.
East Nashville is definitely not alone. It is just one example of a similar trend in other parts of town. The core of Nashville is fully alive with development activity. It doesn’t seem like there could be many vacant city lots left with all of the infill that has been built. But investors continue to unearth building lots and erect dwellings as fast as the permit and inspection process allows. The paint has barely dried before a buyer closes on the new home purchase. As is typical in a hot market, some of the new construction sells before it is even complete. When investors, project lenders, and realtors see the success, it seems natural to want to duplicate it again and again. But with each sale and increase in price, each renovation and new building, is Nashville showing the strength of it’s market, or moving closer to a housing bubble?